Question

Suppose Blue Hamster Manufacturing Inc, is evaluation a proposed capital budgeting project (project alpha) that will require an initial investment of $500,000. The project is expected to generate the following net cash flows:

Year Cash Flow
Year 1 $325,000
Year 2 $425,000
Year 3 $450,000
Year 4 $400,000
Blue Hamster Manufacturing Inc’s weighted average cost of the capital is 10%, and project alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)?
a. $871,690
b. $1,157,991
c. $1,182,991
d. $757,991

Answer 1

d. $757,991.26

Step-by-step explanation:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

= (325,000/1.10) + (425,000/1.10^2) + (450,000/1.10^3) + (400,000/1.10^4)

= $1,257,991.25743

NPV = Present value of inflows - Present value of outflows

NPV = $1,257,991.25743 - $500,000

NPV = 757991.25743

NPV = $757,991.26